Bad news for savers as inflation rises to 2.9% in June

Inflation has risen again, hitting savers hard.

The Consumer Prices Index (CPI) rate of inflation increased to 2.9% in June, from 2.7% in May.

This was mainly because of rises in the cost of petrol and clothing, according to the Office for National Statistics (ONS).

The figure was marginally lower than predicted, but still means there are now no standard savings accounts or Cash ISAs which beat the rate of inflation.

Rising Inflation

Today’s rise in inflation is due to higher petrol and clothing costs during the past month. But lower prices for airfare and food kept it from reaching the 3% mark, which had been anticipated.

It is a 14-month high but still far below the rates seen in 2012, which were around the 4% mark.

The Retail Prices Index (RPI) for inflation was also up, to 3.3% from 3.1% in May. This is different to CPI because it includes housing costs.

Misery for savers

Rising inflation is bad news for savers, as there are now no standard accounts or cash ISAs which negate the effects of inflation.

However, Simon Healy, Managing Director of savings for Aldermore, points out that although rising inflation is a bad thing for savers, in reality if you take a long-term approach the impact is marginal and it's vital savers continue to put away what they can so their pots keep growing.

“With Mark Carney now installed as the new governor of the Bank of England and interest rates certain to rise in the coming years, inflation will fall back to its trend rate, and certainly below the saving rates on offer. Savers should not use inflation as an excuse to stop saving, which would be disastrous in the long-term," he adds.

The Government’s Funding for Lending Scheme (FLS) is also to blame for the lack of accounts on the market.

The scheme allows providers access to cheap loans from the Government so they no longer need savers’ deposits. This has resulted in a dramatic drop in the number of accounts available and the rates on offer.

Alternatives for savers

There is little incentive for people to save at the moment given the fact the rates on offer are so poor.

One alternative is peer-to-peer lending which effectively cuts out the middle man allowing individuals to lend to each other. This is great for savers as the average returns of around 5% are well above that from any savings accounts on the market.

The catch with these is the fact there is no protection of your money, as they are not yet included in the Financial Services Compensation Scheme (FSCS). But this protection is being introduced next year. And until then most sites, such as RateSetter, have provision funds to cover any shortfalls.

Current accounts

With such a dire savings market, current accounts are now a viable option for earning some interest. Several providers are now paying competitive rates of interest on in-credit balances and these are available on an instant-access basis.

The Santander 123 account, for example, pays tiered rates of interest including 3% on balances of more than £20,000. For savers with less money, Nationwide will pay 5% on balances up to £2,500 with its FlexDirect account.

Our article The best bank accounts for cashback has more details.

Investments

This year the allowance for an ISA is £11,520, which can be invested tax-free. And if you want to, you can stick the whole lot in stocks and shares.

However, to get a decent return you need to be invested for at least five years, so this is more of a longer-term option.

You can read more in our guide How to make money from the stock market.

More from Lovemoney.com:

What next for inflation and interest rates?

Are these Britain's best bank accounts?

Where to earn most interest on your cash

The resurgence of the timeshare scam

The beginning of the end for payday loans?

The best fixed rate savings bonds